and Crown Land Sales
sedimentary basins, the provincial and federal governments own the mineral
rights under most of the land. If mineral rights are freehold, company landmen negotiate directly with the owner to acquire a petroleum and natural gas lease.
If the rights are already held or leased by another company, the landmen will
still have to acquire the rights by negotiating an agreement with the owner.
Often the company will undertake exploration, usually by drilling a well, in
exchange for an interest in the mineral rights and production. This type of
agreement is known as farmount. If the Crown mineral rights are not currently
leased, the company must apply to the appropriate government owner to have the
rights listed or posted for competitive bidding at a land sale.
Based on its
economic calculations, the company then submits a bid to the government or other
mineral rights owner. The company with the highest bid obtains an exploratory
permit, licence, or lease. The amount paid at auctions for Crown mineral rights
is known as a bonus payment. Whether freehold or Crown, the owner of mineral
rights also receives a royalty, which is a share of production or equivalent
The terms of
permits, licences or leases generally require that the holder begin exploration
activity within a specified period. If a company cannot afford the work or wants
to reduce the risk, its landmen may farm out the land to others who will
earn a share of production by undertaking exploration. At the end of the initial
term of the lease, if the land has been drilled and oil or gas found, then the
rights are held down to the deepest formation proved to be capable of
production. The rights below that formation are returned to the Crown to be
posted for future Crown land sales. This is referred to as "deep rights
Petroleum Communication Foundation. Our Petroleum Challenge: Exploring Canada's Oil and Gas Industry, Sixth Edition. Calgary: Petroleum Communication Foundation, 1999. With permission from the Centre for Energy.